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Insolvency law changes could mean greater transparency but at what cost?

On the 1st of October 2015, the Insolvency Service introduced new measures with the aim of modernising and strengthening the insolvency and restructuring process. In his expert commentary, Keystone’s finance and insolvency lawyer, Simon Murfitt explains why he believes there is a real danger that the resulting increased regulation could lead to greater costs and delays.

What are the main insolvency changes introduced?

2015 DA (Deregulation Act 2015):-
(i) Reforms the way insolvency practitioners (“IP’s”) gain authorisation to practice. There is now a new system of authorisation where IP’s can be authorised either in relation to appointments over companies, or over individuals, or over both. IPs who are authorised before these changes take effect will continue to be authorised to take appointments over both types of entity. All interested persons should be reminded that any IP who takes an appointment over a member of a partnership that has outstanding liabilities to that partnership, will need to be authorised in relation to both companies and individuals. The aim of the new partial authorisation regime has been stated to be to increase accessibility to the IP profession, increase competition, and reduce the cost of training and ongoing regulation for specialised IPs;

(ii) Simplifies when to report to creditors about appointing and releasing administrators through a series of provisions which negate, in certain circumstances, the need to hold physical meetings. This is to meet the stated aim of bringing the whole process into the 21st Century;

(iii) Strengthens the regulation of insolvency practitioners and the Secretary of State’s, through the Insolvency Service, role as the primary oversight regulator in the sector. For example, there is a specific provision (see schedule 6 of the 2015 DA) which allows the Secretary of State to request and require information directly from any person rather than simply an insolvency office holder in relation to the conduct of a potentially unfit director. Before this specific power was created, any such requests for information would have had to be made through the relevant insolvency office holder; and

(iv) While not strictly with the 2015 DA, but very important none the less, on 3 March 2015 the Insolvency (Amendment) Rules 2015 (SI 2015/443) (Amendment Rules) (the “Amendment Rules”) were laid before Parliament and for the first time introduced a requirement to get an up-front estimate of fees agreed by creditors when an insolvency practitioner wishes to operate on a time and rate basis. Any subsequent variation to this estimate must also be agreed by creditors. The Amendment Rules hereby introduced a new requirement for IPs who propose to charge all or part of their fees for acting as an administrator, liquidator or trustee in bankruptcy on a time cost basis. Such IPs must now provide the following information to each creditor of whose claim and address they are aware, before asking creditors (or the court) to fix the basis of their remuneration on a time cost basis:-

(a) a written "fees estimate"; and

(b) details of the expenses the IP considers will or are likely to be incurred.

Furthermore the fees estimate must specify:-

(a) details of the work the IP and his staff propose to undertake;

(b) the hourly rate or rates the IP and his staff propose to charge for each part of that work;

(c) the time the IP anticipates each part of that work will take; and

(d) whether the IP anticipates the fees estimate will be exceeded so that further approval of the excess will be necessary (and why).

2015 SBE&EA (Small Business, Enterprise and Employment Act 2015):-
(i) Creates a reserve power to make regulations to either prohibit administration sales to connected parties or make regulations to impose conditions or requirements on such sale in order to allow them to proceed. Such “Pre-pack” administrations are not defined in the legislation. This issue however arises out of the 2014 Graham review (the “Graham Review”) where the term is widely held to mean a special type of administration where the post administration sale concerned is:-

(a) agreed prior to the appointment of the administrator; and

(b) which is effected on, or shortly after the appointment of the administrator.

All readers should note however that the Graham Review recommended that the power should target all sales out of administration to connected parties, rather than those that fit this Pre-pack definition. The intention here was to avoid any unscrupulous parties delaying post administration sales to in order to simply avoid legislation targeted solely at Pre-packs;

(ii) Contains further regulation provisions for IP’s and a specific power to establish a single regulator of IP’s. That regulator being the Insolvency Service, acting for the Secretary of State; and

(iii) Removes the requirements for creditors' meetings in corporate and personal insolvency but, if a prescribed number of creditors wishes a meeting to be held to make a decision, this must be provided for.

One by product of this change however is that Part 15 of the Insolvency Rules 1986 will need amendment to make provision for both decisions make without a creditors' meeting and decision make with such a meeting. Hence, any such subsequent legislation need may be interpreted as an actual increase the bureaucracy rather than a lessening of it (sections 122 and 123, 2015 SBE&AE).

Will these likely be successful in achieving their aim?

2015 DA:-
In some cases (e.g. the new regime of appointment of IP’s), red tape and administration may well be decreased, but in others, such as removal of the requirement of certain creditor’s meeting, the opposite might prove true. The key factor will be how the consequential changes to other secondary legislation such as the Insolvency Rules 1986 develop.

2015 SBE&EA:-
In respect of both the Pre-pack sales and single regulator powers, as in always the case with new powers, their success or failure will depend on the how and when the relevant authority intervenes and how they are deemed to have performed in such interventions.

For both stated aims of:-

(i) to provide greater confidence to unsecured creditors and other affected stakeholders that a Pre-pack represents the best outcome for them (for Pre-Pack reserve powers); and

(ii) Strengthen the regulatory framework for the regulator to deal effectively and efficiently with any IP’s poor performance and abuse of the system and thereby to provide greater confidence in the insolvency profession (for the new single IP regulator);

to succeed the regulator will need not only to act quickly and openly when asked to do so, but also ensure that they as clearly seen to be doing so for all interests and not just those of the directly interested parties.

Are there any grey areas or could there be any unintended consequences?

2015 DA:-
The aim to increase access to the IP profession through the new regime of partial authorisation may be considered by some as laudable. However, others might conversely be concerned about the risks of having these new authorised IPs acting in what is a fluid complex and regulated commercial environment. These new “Mini-IP’s” will not necessarily have a detailed or complete understanding of either the relevant personal or the corporate insolvency rules and regimes. As such there may well be scope for greater, not less, misconduct and error.

2015 SBE&EA:-
As with any effort to minimise red tape and administration, without a full and proper review of the existing framework, any deletion may well lead to additional stop gap or “band aid” legislation and reforms which if they occur too often may well result in a combined regime which is more complex and admin heavy than the old one. Such a result, would defeat one of the primary aims of this Act.

Will the changes clarify and streamline the most cumbersome processes or has anything been missed out?

2015 DA:-
The insolvency provisions contained within the DA are limited but, as its title suggests, the changes are largely designed to cut down on red tape. The DA also takes the opportunity to clarify procedural uncertainties that have arisen; in particular, the notice provisions relating to the appointment of administrators where there is no QFCH and the effectiveness of an appointment of an administrator despite the filing of a winding-up petition issued after the notice of an intention to appoint.

In respect of what is missing, there are currently provisions in relation to appointments over a limited partnership (rather than over an individual partner). As noted above, presumably an IP who accepts an appointment over a limited liability partnership (an “LLP”) will need to be authorised in relation to companies, given the corporate treatment of LLPs pursuant to the Limited Liability Partnerships Act 2000.

2015 SBE&EA:-
The reduction of creditors’ physical meetings will undoubtedly be welcomed as long as all the new requirements such as informing all known creditors of the anticipated IP’s fees are met. While there does not appear to be a formal requirement in the new legislation, the next logical step is for the form of the IP’s fee estimate and letters of engagement to follow those of the legal professional an include details of their complaints’ procedure.

Did you hope for any other changes to be made?

Yes, and they are contemplated by the phased enactment of the DA and SBE&E provisions. A whole area of secondary legislation such as that need to update the Insolvency Rules 1986 is needed. In addition, the underlying recognised professional bodies or “RPB’s” of IP’s will undoubtedly need to reassess their own constitutions, scope and charging structures as all this additional regulation will need to be funded by the RPB’s, who will undoubtedly need to pass such cots through to their members, the IP’s.

What should lawyers advising in this area take note of?

Solicitors, inter-acting with both IP’s and creditors, will need to ensure that the IP’s are properly appointed under the new regime and that they have complied with the new fees regime. The latter is particularly relevant if the IP in question is instructing the solicitors and hence the latter’s fees will be included as a disbursement on the IP’s bill!

New care and attention for post administration sales will also be needed to ensure compliance in line with both the new legislation and the intention behind the Graham Review.

Finally, as noted above the implementation of these Acts, particular the 2015 SBE&EA are phased and as such more changes are to come and hence all solicitors and IP’s need to continue to watch this space.

Are there any detectable trends? What are your predictions for the future? Any more changes on the horizon?

Notwithstanding the fact that one of the key drivers behind these amendments is the previous Government’s Red Tape Initiative, the obvious key trend in both the Acts discussed, is one of greater regulation and over sight by central government. This trend is a reversal of what in recent years has been a largely industry lead regulation regime for IP’s. While not surprising post 2008 financial crisis, there is a very real danger that this increased regulation could lead to greater costs and delays notwithstanding the new regimes’ stated aims.

The hope is that all of these changes and others, notwithstanding the potential increased costs, will have the desired effect to create greater consumer confidence through its greater transparency and ease of use. Finally, individual IP’s and RPB’s should note that after the transitional period ending on 30th September 2016, the Secretary of State will no longer directly authorise IPs and hence full compliance with the new regime will be more important than ever.

This feature was written for and first published by LexisNexis, Tolley's Company Law and Insolvency Newsletter.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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